The first appeal hearing involving interest rate swaps begins today in the court of appeals. This appeal will have a significant impact on small businesses affected by interest rate swap products.

It is estimated that some 40,000 small businesses used an interest rate swap. These financial products were designed as a protection against interest rate rises on business loans. However this did not reflect in the interest on the loan when the interest rate decreased as a whole. This in effect created crippling interest rates for businesses who bought into these hedging products.

Interest rate swap court Appeal

Clarke Willmott LLP is acting for Paul Rowley and John Green in the Appeal. The business partners claim that RBS mis-sold them an interest rate swap in 2005 by failing to inform them of the additional costs attached to the swap.  The costs have totalled £400,000 against a £990,000 loan  Their claim was dismissed in December 2012 but since then the FSA, which was recently replaced by the FCA, has published a review of its investigation into the selling of interest rate swaps and concluded that in order to comply with its regulatory requirements, it expected banks to provide customers with:

”an appropriate, comprehensible, fair, clear and not misleading disclosure of any potential break costs”

The review also found that over 90% of the cases it had looked at did not comply with one or more of their regulatory requirements. Clarke Willmott LLP is acting for dozens of clients affected by interest rate swaps, with the average break costs for these amounting to £353,000


Update to Interest Rate Swaps

What are Interest Rate Swaps?

Interest rate swaps are commonly sold with business loans as a way of protecting against interest rate rises that may result in unmanageable loan repayments. There are four basic types of interest rate swaps:

• Swaps – enable interest rates to become fixed.
• Caps – an ongoing premium or single upfront fee that caps interest rate rises.
• Collars – interest rates are limited within a range.
• Structured collars – the interest rate range features a lower ceiling than a standard collar, but complex payment arrangements make higher interest rates payable if the base interest rate dips below the floor limit.

The Problem with Interest Rate Swaps

According to the Financial Services Authority, approximately 40,000 interest rate swaps have been bought by SMEs since 2001, with the majority of sales occurring from 2005 to 2008. During this period of heavy interest rate swap marketing, the 5.5 percent base rate of interest was predicted to rise.

Instead, the base rate fell to its current historic low of 0.5 percent. This has left SMEs with the options of facing debilitating monthly payments or paying extraordinarily high interest rate swap exit fees. As such, many SMEs have made the following complaints about interest rate swaps:

• The interest rate swap was a requirement for loan approval.
• The level and duration of the interest rate swap did not match up with the underlying loan.
• A fee of up to 50 percent of the loan amount would be charged for an early interest rate swap termination.
• Banks often sold SMEs on the benefits of interest rate swaps, but they neglected to inform them of the risks.

FSA Review of Interest Rate Swaps

The June 2012 review of interest rate swaps, which was performed as a result of the number of complaints the agency received, concluded that interest rate swaps were seriously mis-sold to SMEs. Since the review, banks have agreed to provide reasonable redress to ‘non-sophisticated customers’ who were sold structured collars, review the interest rate swaps sales process, and review the sale of caps to ‘non-sophisticated customers’ and provide them with fair redress in appropriate circumstances.

‘Non-sophisticated customers’ are defined as anyone lacking adequate knowledge and understanding of interest rate swaps. To identify ‘non-sophisticated customers,’ the FSA has formulated a complex ‘sophistication test’.

See “non-sophisticated” Test Q&A

Present Situation

The February 2013 results of an FSA pilot test revealed that 90 percent of reviewed cases did not comply with the regulatory requirements outlined by the FSA. A substantially higher number of reviewed cases should have resulted in redress to ‘non-sophisticated customers’.

Possible Legal Action

An SME that does not meet the ‘non-sophisticated customer’ classification can file a civil claim against the offending bank. Additionally, an SME falling within the scope of an FSA review that is unhappy with the offered redress may also file a civil claim against the bank. In either case, a civil claim can be brought against a bank on the basis that it breached the requirements detailed in the Conduct of Business Sourcebook published by the FSA.


A statute of limitations exists that restricts claimants from filing a claim after six years from the date the interest rate swap was taken out. Due to the fact the most interest rate swaps were taken out between 205 and 2008, SMEs should take immediate action now in the civil courts if they hope to be compensated for being mis-sold interest rate swaps.

Changes in Cost Rules

The recent changes in cost rules dictate that the cost of the insurance policy a claimant must take out to cover bank costs in the event of a failed claim can no longer be recoverable from the banks if a claim is successful. Instead, the cost of the policy must come out of the compensation received from the bank. This is likely to result in fewer filings of smaller claims, because the cost of the insurance policy may outweigh any compensation.

Although many claimants may receive considerable compensation to cover the cost of the required insurance policy, many SMEs with smaller claims may end up on the losing end of yet another mis-sold bank product.



+Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.